The Bank of England will need to push interest rates above the 4.25% peak currently forecast for next year, according to the National Institute of Economic and Social Research (NIESR), which warned in its Autumn 2026 Economic Outlook that the projected level of tightening will prove insufficient to bring inflation back to target in a timely manner.
NIESR projects that inflation will peak at 4.4% in February 2027, up from 3.8% in July. That forecast stands above the central bank's own expectation of a 4.9% peak, which the Bank attributes almost entirely to energy prices, with a gradual pick-up in food inflation also factored in. The Bank expects services inflation to remain broadly flat until March next year. Governor Andrew Bailey has noted that companies have been shielded by longer energy price fixes and hedging more generally.
The think tank's assessment follows the Monetary Policy Committee's decision on November 5 to raise the bank rate by 25 basis points to 4% from 3.75%. It was the first hike since August 2023 and made the Bank of England the last G7 central bank to begin tightening. Every committee member voted for the increase.
NIESR anticipates one further rise, to 4.25% next year, but stated plainly that “that will not be enough.” Markets are pricing Bank Rate reaching around 4.75% next year, a path NIESR described as “closer to what is needed.” Under that market-implied trajectory, inflation would return to target in early 2029, roughly 18 months sooner than in NIESR's central forecast, at a cost of around 0.4 percentage points off GDP growth in both 2028 and 2029.
By contrast, NIESR's central forecast does not see inflation returning to target until late 2030, around two years later than the projections of both the Office for Budget Responsibility and the Bank of England.
The outlook for government debt has already begun to reflect these pressures. The ten-year gilt yield reached 5.5% on 8 October, its highest level since 2000. The Budget on 28 October cut headroom against the fiscal rules to £14.5 billion from £23.6 billion in March. NIESR said the deficit reduction plan lacks credibility because it requires a £100 billion turnaround in the primary balance over five years.
“The longer the MPC defers the required tightening, the more embedded inflation becomes and the larger the eventual rise in Bank Rate,” NIESR said.
The think tank's warning underscores the tension between the Bank's gradual approach and the scale of adjustment that some economists believe is necessary. With inflation projected to remain above target for several years under NIESR's central scenario, the path of interest rates and the credibility of fiscal plans are likely to remain central to market scrutiny in the months ahead.